Partner Remuneration Calculator (Section 35(e))

What changed, and what did not

The Income-tax Act 2025 commenced on 1 April 2026 and repealed the Income-tax Act 1961. Partner remuneration no longer sits in Section 40(b). It is now Section 35(e), inside the list of amounts not deductible in computing profits and gains of business or profession.

The numbers did not move. The 2025 Act re-enacted the limits introduced by the Finance (No. 2) Act 2024, word for word. If you have been applying the AY 2025-26 figures, you are already applying the current ones. What changes is the citation on your working papers, your notice replies and your audit file.

How book profit is built

Book profit is the net profit shown by the profit and loss account for the tax year, computed under Chapter IV-D, increased by the aggregate remuneration to all partners where that has been debited. Two details in that sentence decide most computations.

First, the add back covers all partners, not only the working ones. Remuneration paid to a sleeping partner is separately disallowed under 35(e)(i), but it still enlarges the base on which the ceiling is worked out.

Second, interest sits ahead of remuneration in the sequence. Interest within 12 per cent is allowed before book profit is struck. Interest above 12 per cent is disallowed first, so it adds back into the base and slightly raises the remuneration you are permitted to pay.

The four gates, in order

1. 1

   Is the partner a working partner? Section 35(e)(v)(B) defines one as an individual actively engaged in conducting the affairs of the business or profession. Because it says individual, a company or another firm holding a partnership interest can never be a working partner. Anything paid to a non working partner is gone in full.

2. 2

   Does the deed authorise it, for this period? The clause has to exist in the deed applicable to the period the payment relates to, and it has to fix the amount or the manner of computing it. A deed executed in July with effect from April buys you nothing for April to June.

3. 3

   Is the aggregate within the ceiling? This is one ceiling for all working partners put together. Splitting the payment across more partners does not create more room.

4. 4

   Is the interest within 12 per cent? Only the excess is disallowed, not the whole, provided the deed authorises interest in the first place.

Where firms lose money on this

• Paying to the ceiling without checking the deed. If the deed names a lower figure, that figure wins. The Act sets a maximum, not an entitlement.
• Treating the ceiling as per partner. It is an aggregate. This is the single most common error in scrutiny.
• Forgetting TAN. Since 1 April 2025 a firm paying its own partners has to deduct tax at source. Most firms never needed a TAN before and a good number are in default without knowing it. See partnership firm compliance.
• Assuming the disallowance is neutral. It is not. An amount disallowed to the firm is correspondingly not taxable in the partner's hands, so the disallowance is a real cost rather than a shift of income from one hand to another.
• Claiming remuneration alongside presumptive income. Under Section 58 the deemed percentage is the whole answer. Nothing further comes off.

Reviewed by CA Deepak Jaiswal. This calculator is a working aid and not a professional opinion. It applies the ceiling in Section 35(e) of the Income-tax Act 2025 to the figures you enter. Verify the deed clause, the Chapter IV-D computation and the final numbers with your CA before filing.